Debs must look in mirror for Xmas trading woes

It always looked premature to assume, as some commentators did, that the festive season on the high street was alright simply because Next’s Christmas trading was not as bad as feared.

So it has transpired.

Rumours have been swirling in the City for weeks that Debenhams was struggling – “the share price at 32p tells you something’s wrong”, one rival retailer told me just before Christmas – and sure enough, the UK’s second-biggest department store chain has today issued a profits warning.
And an absolute lulu of a profits warning it is too.
Debs, as it is universally known, is now guiding the market to expect profits during the current financial year of between £55m-65m. That compares with previous guidance of £83m and an out-turn of £95m last year and reflects the extent to which Debs had to cut prices in order to remain competitive.

Image: Debenhams says it was hurt by a highly promotional market over the Christmas season
Shoppers did come out during the final few weeks before Christmas, with most of the damage done during the start of the 17 week period to 30 December on which the company reported today, but ominously trading then fell away in the immediate post-Christmas sales period despite more markdowns.
Those markdowns have eaten into profit margins.
The question is how much of this reflects general weakness on the high street due to weakening consumer spending and how much of it reflects problems specific to Debs.
The surprising update from Next, along with indications that John Lewis did well over Christmas, suggests it is the latter – although Debs was at pains to point out today that comparisons with Next are wide of the mark as the latter derives a far greater proportion of its sales from clothing.
The truth is that Debs has structural issues that are inhibiting its ability to trade its way through the current tough retail climate.

Image: The chain said it found post-Christmas sales particularly tough
It has too many stores and was not as fast into digital as some of its competitors. Recognising that, the company hired Sergio Bucher, the former head of Amazon’s European fashion business, as its new chief executive just over a year ago.

He has already unveiled his strategy for turning around the business but clearly this is going to be a long job, although progress seems to be being made in digital, where sales during the period were up by just under 10%.
Mr Bucher also pointed out today that Debs grew sales in both beauty products and food, two areas he has targeted as crucial to the future growth of the business.
One specific problem for Debs during the pre-Christmas trading period appears to be that competition was particularly intense in gifts where, Mr Bucher has admitted today, the retailer’s ranges were not sufficiently distinctive or sufficiently premium.
This may have been something beyond his control as, given the lead times involved, he and his colleagues may well have been trying to shift lines that were ordered and bought under the previous managerial regime.
Financially speaking, Debs has high ‘operational gearing’, which means that it has a very high fixed cost base.
This means that a slight rise or fall in sales can translate into a big rise or fall in profits. Accordingly, the drop in profit margins that Debs has reported today – some 1.5 percentage points – has been enough to wipe out a fifth of this year’s expected profits.
It means Mr Bucher is likely to have to accelerate his turnaround plans.
Contrary to some reports, all of the stores in the Debenhams estate are profitable, although some are more profitable than others. That may mean, depending on the leases of individual outlets – Debs owns few of its own sites – some stores may close, although Mr Bucher’s solution to date has largely involved allowing other operators to take space in sites where he has felt Debs has too much.

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After today’s sharp share price reaction some will speculate that Debs, whose stock market value is now down to just £440m, may now be a takeover target.
This seems somewhat unlikely given the challenges facing the business and its relative lack of assets. Any would-be buyer is likely to sit back and wait to see how Mr Bucher’s turnaround progresses during coming months.